Revenue Problem or Spending Problem?

Kevin Drum argues that, “We Don’t Have a Spending Problem. We Have an Aging Problem.”

Ever since Ronald Reagan first said it, Republicans have been fond of insisting that “we don’t have a revenue problem, we have a spending problem.” But it turns out that isn’t true. Let’s take a look at the raw data.

Spending first. In 1981, when Reagan took office, the federal government spent 22.2 percent of GDP. That figure dropped steadily for the next two decades, and by the year 2000 spending was down to 18.2 percent of GDP. Expenditures went up after that, but the Office of Management and Budget estimates that by 2017, spending will once again be 22.2 percent of GDP, exactly the same as it was 30 years ago. In other words, spending hasn’t gone up at all.

[…]

So how about tax revenue? The basic chart is below. It shows that tax revenue was 19.6 percent of GDP when Reagan took office, and it’s projected to be 19.2 percent of GDP in 2017.

The facts are pretty clear. Spending isn’t our big problem. The recession spike of 2008 aside, it’s about the same as it was 30 years ago. But instead of paying for that spending, we’ve repeatedly cut taxes, which are now at their lowest level in half a century. Tax revenue will go up as the economy improves, but even five years from now it will still be lower than it was when Reagan took office.

There are handy-dandy charts and more analysis at the link. But this analysis hardly settles the problem. If the government’s spending 22.2 percent of a much smaller GDP was “the problem” in 1980, the fact that we’re massively increasing the debt with a negligibly smaller revenue share of GDP is hardly dispositive. After all, if we cut our spending from 22.2 percent of GDP to 19.2 percent of GDP, we’d have a balanced budget.

Drum is more persuasive, though, on the second part of his analysis:

So what’s our real problem? That’s simple: America is getting older and healthcare costs are rising. That means we’ll need to spend more money in the future on Social Security and Medicare. There’s simply no way around that unless we’re willing to immiserate our elderly, and that’s not going to happen. Not only is it politically inconceivable, but the truth is that even Republicans don’t want to do it, no matter how tough a game they talk. Like it or not, this means that over the next 20 or 30 years, spending on the elderly is going to go up by three or four percent of GDP.

Now–and I think he would agree–there are ways to spend massively less on healthcare without immiserating the elderly. But it would require a massive restructuring of the US healthcare system that most Republicans vehemently oppose and which few Democrats, President Obama certainly not among them, are willing to fight for.

So, we seem to be stuck paying massively more for healthcare. That essentially leaves the Defense budget as the big ticket item where savings could be achieved. It happens to be 4.7 percent of GDP, compared to 2.6 percent in the UK, 2.2 percent in France, and (a reported) 2.0 percent in China. It we got down to comparable levels, we’d come pretty close to balancing the budget. But we’re already getting wailing and gnashing of the teeth at the prospect of sequestering a relatively tiny portion of the Defense budget; cutting it in half isn’t going to happen.

Ultimately, then, our problem is a gap between our appetite for government programs—especially Defense and old age entitlements—and our willingness to pay for them. If we’re not willing to cut our wish list or follow a European healthcare model—and we’re not—then we’ve either got to raise more revenue or resign ourself to ever-increasing debt service. The latter, of course, is a form of spending.

@OzarkHillbilly: @OzarkHillbilly: Not sure why you’re arguing against yourself here! But, yes, there are 13 European countries ahead of the United States on the list. And pretty much everyone above the US–including Cuba–has some sort of socialized medicine.

This is pretty basic math.
We had a balanced budget. Then Republicans slashed taxes…and the low tax rates failed to produce the promised growth (or unicorns).
So we have a revenue problem. Democrats took a step towards repairing that damage last week.
Then Republicans spent a shitload of money. Two wars they couldn’t finish. Medicare Part D.
So we HAD a spending problem. Spending is flat now with Obama in the WH.
You could say its not one or the other but both.
Or you could do the math and acknowledge that we have a Republican problem.

I doubt if cutting the defense budget in half would actually balance the budget. Many cities would become ghost towns if the Defense Budget is cut in half. In addition, the unemployment rate for STEM types would be so high that only the dumbest college students would pursue a career in a field with no jobs.

What will the U.S. economy look like with a massive decrease in STEM jobs, a pay cut for very healthcare work while adopting comprehensive immigration reform that will allow almost unlimited legal immigration.

Do progressive really believe that they are clever enough to take advantage of a high tax, big safety net country while avoiding the costs and the downsides? I would assume that Kevin Drum thinks he is clever enough to avoid the massive take increases that will be required to fund his vision of the future.

If Al Gore would have been elected in 2000, the federal budget would have still been in deficit. Why do progressives keep repeating that lie that the balance was going to stay balanced after the dot.com bubble burst. The current accounts of the federal government was running negative before GW Bush was even sworn in.

Also, the only reason that spending is flat is that President Obama has to deal with a Congress for the last two years that was not about to approve new spending programs. Of course two years after the stimulus spending was suppose to end, the federal government does not have a budget and is still running $1 trillion dollar deficits.

Superduperpooperscooper…
Those deficits are driven by the Bush tax cuts, the unpaid-for wars and the unpaid-for Medicare expansion…plus the debt service on those credit card items.
And Republicans are not keeping spending down…they are holding back the recovery…for their own political purposes.
Republicans are the problem…

It is all about health care. When people talk about big government, they usually mean discretionary spending, but that is not increasing (went up some under Bush but coming back down). To cone down more, it is about health care for the elderly since 1/3 of Medicaid spending is also for the elderly. If you cut defense to 2% of GDP, you just delay the problem. Social Security is a demographics problem. Fairly easily, but not painlessly, fixed in many ways. With health care, we have costs rising faster than inflation. Even without the surge of people due to retire Medicare will eventually bankrupt us. The demographics just makes it worse.

The bad part about health care is that no one really knows for sure how to cut growth in costs. I think you are correct that no one wants to take on the special interests lobbying for the elderly. That makes it harder to find a political solution, like cutting care or dropping people from coverage, but the fact is we don’t know how to successfully cut costs. They rise as fast or faster in the private sector.

The Europeans, and some Asian countries, are also facing these cost pressures, but they have a better chance of solving them as they tend to have all of their people in the same health care system. Everyone is affected by the changes they make, so they can avoid the divisive approach we see in our system.

What we have is a jobs problem. Too much regulation, the Obama care effects, and uncertainty about what Congress will do. As far as health care goes, I have seen too many specialist referrals, too many doctor visits that are unnecessary (chats can be done over the phone), over testing, and over medicating. We are partly to blame when we see a doctor when we should “stay home, take an aspirin, and get plenty of rest”. We now have overused antibiotics to our own detriment. Some doctors are using medicare by having the elderly brought in 3-4 times a year unnecessarily. Emergency rooms have a lot of people there for non- emergencies and for some reason bring 5 relatives, 3 friends, and some neighbors with them to provide a perfect spreading ground for germs.

There are 2 million fewer jobs today directly attributable to Republican obstructionism. If not for Republicans the UE would be around 6% and dropping…not 7.8% and holding.
That would lead to more demand and more growth.
Republicans are the problem…low revenues and big spending are the symptoms.

Americans have a problem that strongly correlates to the notion that we don’t want to pay for the government that we want.

Republicans are engaged in trying to rebrand social benefit programs such as Social Security and Medicare as “entitlements” rather than ‘benefits’ because they are convinced that if Americans can be sold on that rebranding that we will want to get rid of (or privatize) programs that (to current conservatives) rewards undeserving people.

We’ve got tons of problems. First and foremost are rampant and now systemic unemployment and underemployment. Ironically enough our joblessness problem not only was caused directly by leftism as policy (excessive regulations, high corporate tax rates, the added legacy and operational costs of labor unions, the never-ending quagmire of the “war on poverty”) but leftists could not connect the obvious dots, even if you sat down and went over them using flow charts and puppet shows. Sigh.

Concerning healthcare, specifically, we’ve got a major cost control problem. To a massive extent that’s because of the junk lawsuit and “jackpot justice” cottage industries. Which in turn have been fostered by the ATLA, the CTLA and of course the Democrat Party apparatus. Med. mal. cases. Class actions. MDL litigation. Punitive damages. “Emotional distress” damage claims. “Non-class” class actions. Strict products liability. UCC warranty claims. Etc. The healthcare industry spends hundreds of billions of dollars each year on the legal costs of doing business. Whom do you suppose ultimately has to pay for that? Duh.

It’s not a coincidence that back in the 1980’s California was on the verge of a medical cost and services availability calamity, but then with the enactment of the “MICRA” statute things nearly instantaneously turned around. Out in the real world laws and policies have serious consequences.

With the stroke of a pen we drastically could reduce medical malpractice insurance premium costs, third-party liability insurance premium costs, and the compliance and risk avoidance costs of doing business for Rx and medical device manufacturers and distributors. This thereby dramatically would reduce the overall costs of healthcare. California’s med. mal. law is and remains the archetype, but there have been major improvements over the years. If we took Texas’ broad tort reform scheme, for example, added a few wrinkles, and then enacted it as a national statute, as soon as the ink dried the costs of healthcare would begin coming down.

The other major point is that HSAs are the best thing going for managing health care expenses and for building up private nest eggs to cover health-related expenses as we age. Those accounts should be beefed up and expanded. It’s a no brainer. Pre-tax dollars that sit in tax-free accounts and which pay the costs of healthcare. For obvious reasons, however, don’t hold your breath. In the twisted minds’ eyes of leftists private healthcare savings accounts are evil and verboten. All part and parcel of the big U.S. slide.

It’s not as though our “aging problem” is a surprise. We’ve known about it for more than sixty years, surely enough time to prepare. We might have put the steps necessary into place to react prudently to it. We didn’t. In the absence of such prudent and timely action, the prospect we now face is being incorrectly posed as a choice between penury for elders and bankruptcy.

As an alternative we might try spending less on some things, e.g. the military, foreign adventurism, agricultural subsidies, and inflated incomes for bankers, physicians, and tax attorneys, while we inevitably spend more on an aging population, trying as best as we can to limit total spending to something in the general neighborhood of what we’re willing to pay.

The other major problem with healthcare, so ironic it boggles the mind, is Obamacare.

Since that law was enacted health insurance premium costs have been skyrocketing. The reasons are obvious, although in a ghastly irony they’ll be lost on the political left. The primary variable item that impacts the cost of insurance is the number of claims against coverage. By adding vast numbers of potential claimants (minimum requirements for plan-sponsored coverages; the individual mandate) and simultaneously by expanding the scope of their prospective claims (elimination of the preexisting conditions exclusion) Obamacare directly has caused further increases in the costs of covering healthcare expenses.

And now, in an another layer of ghastly irony, companies are laying off people or not hiring people, to stay under the 50-employee threshold for Obamacare, and separately are converting people in droves to part-time employment, and then stripping them of their health care insurance benefits. The reason? Again, because Obamacare is causing premium costs to skyrocket. Fewer people employed means less revenue for the government. More people in need of public assistance means more government spending. A vicious cycle. Obamacare now is yet another federal law (AFDC, Medicaid, extended unemployment insurance benefits) that by its own ironic machinations will foster increased long-term poverty rates and higher overall deficits, despite the fact that Obamacare also is a tax scheme.

We were heading in any event towards becoming Europe West. The “war on poverty” ultimately would have reached its inevitable denouement. But with Obamacare now all but permanent we’ll get to that sorry state quicker and the negative fallout will be that much greater.

Ten years ago, my family moved into a MN upper/middle-class suburb with a Republican city manager. In our yearly newsletter, he wrote:

City residents consistently demand amenities like clean parks, smooth roads, quality schools, and competent police/fire departments. All of these amenities cost money, which must be paid via local taxes. If you are angry about local tax increases, you are invited to clearly identify which amenity you wish to go. Simply waving your hand and decrying “waste” isn’t enough.

Our local government has stayed Republican and the city has passed several spending referendums. Our property values have remained high even through the real-estate crisis.

Until the national Republican Party will come out and state exactly what they wish to cut, they are not a party of principles, but instead, they are a mob of slogans.

We’ve got tons of problems. First and foremost are rampant and now systemic unemployment and underemployment. Ironically enough our joblessness problem not only was caused directly by leftism as policy (excessive regulations, high corporate tax rates, the added legacy and operational costs of labor unions, the never-ending quagmire of the “war on poverty”) but leftists could not connect the obvious dots, even if you sat down and went over them using flow charts and puppet shows. Sigh.

That all comes across as “what can we possibly think of to make this not a market outcome?”

It is also true that different dollars of spending have different jobs impacts. When we reduced the number of directly employed non-combat personnel, and increased the number of high priced weapons systems, we created many “ghost towns” around former bases. And we shifted spending to the prosperous tech centers.

The Clinton Administration (not Democrats) adopted fiscal restraint because the economy was booming, Clinton decided to throw the Congressional Democrats under the bus, and Clinton knew that the REpubilcans in Congress from 1995 to 2000 were not about to approve any new spending programs.

Maybe President Obama would be facing the same employment situation is he threw the Congressional Democrats under the bus.

Nonsense. The idea that more deficit spending would lead to a healthier economy in the long run is wrong. All it would due to create another special interest who would keep demanding more government spending forever.

Those deficits are driven by the Bush tax cuts, the unpaid-for wars and the unpaid-for Medicare expansion…plus the debt service on those credit card items.

Actually, SD is partially right on this one … which gets to a bigger issue. While it is true that numerous Bush policies (voted in by a Republican led House and Senate, and with the support of Democrats) accelerated the growth of our debt, the fact is that the debt would have happened any way due to slowdowns in the economic sector.

One issue that needs to be raised — and no one wants to do this — is the question of what is a realistic and sustainable level of economic growth/GDP for a healthy US. For the last thirty or so years we were treated to unsustainable growth due to a number of “bubble cycles.”

Its doubtful that revenue is going to get back to pre-2008 levels, let alone mid/late 90’s levels, anytime in the near future. But acknowledging that currently flies in the face of the American (Economic) Exceptionalism that both parties push.

The problem is when people mention specific budget cuts, they are demogouged. Any city that has a minority or small business set aside programs is a city that has more than enough money for fire departments, roads, and schools but just chooses to spend the money on pork.

A study done at the Harvard school of public health found that medical liability costs made up a total of 2.4% of annual healthcare spending. And you’re ignoring the benefits that imposing liability provides to consumers. You don’t have to be a genius to figure out this isn’t what is driving up costs.

This issue of whether we have a “spending” or “revenue” problem is really nonsensical. Given the political make-up of this country it will be impossible to reduce our debt solely through tax increases, or solely through spending cuts. Arguing over whether the problem is with spending or taxes implies that there is only one solution, and gets us nowhere. The only feasible way to reduce our debt (that doesn’t involve high inflation or default) is through a combination of both. The public focus really needs to shift away from “is it spending or revenue” to “how much more revenue, and how much less spending.”

“It’s the prices, stupid” That’s the title of an influential research paper by Uwe Reinhardt, a member of the Princeton economics department, and colleagues. Search for the article online and you’ll find that Europeans get more medical care than Americans with better outcomes, more universality of coverage, and lower per capita costs. The reason is that prices for medical services are higher in the US than in Europe. Vaginal deliveries, MRI scans, appendectomies, you name it – we pay a lot more than in Europe. Why?

Reinhardt and colleagues explore various possibile reasons for these price . If I remember correctly, they don’t think much of the argument deployed here by Tsar Nick. Their explanation for lower health care prices in Europe is that the organizations that pay for health care there have much more bargaining power than their counterparts in the US, and are able to negotiate lower prices. In addition, administrative costs incurred by insurers and by providers of medical services are lower in Europe.

I’ve brought this up in private conversations and in forums like this one. The usual response is yeah, you’re right, but so what. Doctors won’t allow cost controls on their services. Hospitals won’t either. And even if they did, the Republicans won’t go along – they’ll talk about death panels, and throwing granny under the bus.

The idea I get is that we’re the little engine that can’t. We can’t control medical inflation. We can’t control inflation in the cost of higher inflation. We can’t cut military budgets. We’re screwed, and if you want to see who’s responsible, look in the mirror.

Citizens may have good arguments regarding where money is spent by our governments. However, over the past thirty years, the Republican Party has slowly transformed (can’t say ‘evolved’) from a caucus that drew policy from fact and figures into an inchoate horde of backbenchers who use slogans and marketing-savvy language to disguise undeniably unpopular proposals.

Paul Ryan’s reputation was built upon his two papers (they sure as hell weren’t budgets) that used preposterous math and two-bit euphemisms to hide where the magical money was going to come from. He, his running-mate, and his political party demagogued ‘Obama Will Cut $716 Million’ during the 2012 campaign even though Ryan’s proposal did the same thing.

If the GOP were as courageous in public as they are in front of their closet mirror, they’d come right out and state: We favor subsidizing the already wealthy. We favor ending all government assistance – health care, housing, education – for the poor.

I still think that’s very misguided, but it does have the virtue of honesty.

I’ve brought this up in private conversations and in forums like this one. The usual response is yeah, you’re right, but so what. Doctors won’t allow cost controls on their services. Hospitals won’t either. And even if they did, the Republicans won’t go along – they’ll talk about death panels, and throwing granny under the bus.

Exactly right. Case in point, the when the Republican controlled House passed the Supplemental Medicare Prescription Drug Plan, they wrote into the legislation that the government is prohibited from negotiating lower prescription drug prices.

I love how progressives always use the line that understanding facts means that people will agree with you. Government at the state and local levels has been growing faster than inflation and population growth. That is because government at the state and local level seeks out new ways to spend money. Look up the ratchet effect in wikipedia. Look at how education costs have double adjusting for inflation since 1990 but performance has not improved at all. That is because school systems found new ways to spend money.

When progressives are in charge of government, it will find new programs and new entitlements to spend more money. The problem is that people who claim to be motivated by facts always seem to find a fact that will justify spending more money and raising taxes.

When progressives are in charge of government, it will find new programs and new entitlements to spend more money.

Perhaps you can direct us to some of the hundreds of comments you surely made during the Bush years decrying the vast increase in the size, cost, and power of the federal government – you know, the one that was driven by alleged conservatives.

The reason is that prices for medical services are higher in the US than in Europe. Vaginal deliveries, MRI scans, appendectomies, you name it – we pay a lot more than in Europe. Why?

In the rest of the world(tm) there is something called “healthcare policy”. That means that there are public owned hospitals and clinics and that the government can deal with salaries and other expenses. You can create policies to increase the number of doctors, if necessary. Yes, people can wait in lines to go to the doctor, but that means that everyone has somekind of health protection and that means that there are cost controls.

On the United States the big role of the government is paying the bills. Medicare and Medicaid basically does that, and everyone that has private insurance only has medical coverage because there is a tax credit for employers to do so. So, there is no cost control, and as Dave Walker noted, there is no healthcare budget.

That´s not free market, that´s rent seeking. There is a VERY large number of for profit hospitals in the US, even 60 Minutes pointed out to fraud in for profit hospitals. In most countries doctors aren´t millionaires, you can pay medical expenses out of pocket.

In the rest of the world(tm) there is something called “healthcare policy”. That means that there are public owned hospitals and clinics and that the government can deal with salaries and other expenses. You can create policies to increase the number of doctors, if necessary. Yes, people can wait in lines to go to the doctor, but that means that everyone has somekind of health protection and that means that there are cost controls.

In most advanced countries, there’s a government regulated healthcare market but it’s not along the British line of state-owned hospitals with doctors as civil servants. It’s more like Medicare with much lower payouts.

@anjin-san: The American people writ large oppose it, mostly because they believe that the alternative is the British system. Americans simply have so little understanding of the rest of the world and have so long been conditioned that everything we have here is far and away the best of the best in the world that it’s a hard sell. And, frankly, the Democrats really haven’t tried to sell it in decades. HillaryCare was an abject disaster because of how hamfistedly it was executed.

@James Joyner: “Americans simply have so little understanding of the rest of the world and have so long been conditioned that everything we have here is far and away the best of the best in the world that it’s a hard sell.”

Boy, you nailed that one. While researching a foreign vacation in 2007 or 2008 I stumbled on a long thread (well over 1000 posts) in the Fodor travel forum on whether the American health care system as it then existed was better than the health care systems in other developed countries. I didn’t keep an exact count, but the American response was pretty much split while the Europeans almost unanimously regarded the American health care system as an unmitigated disaster.

It was fascinating to see so many Americans go on endlessly about the horrors of European health care while totally ignoring the comments of most of the Europeans. When it comes to the world outside the United States, many Americans display the same aggressive ignorance displayed by citizens of the Soviet Union during the Stalin period. The horrible thing is that our ignorance, unlike that of the Russians, is voluntary. Our right wing hucksters, Limbaugh, Beck, Hannity, et al, are lying to us, but many of us want to be lied to.

You may want to notice that Bush II left office with a 20% approval rating and the Republican Party is now irrelevant to politics partially due to the Bush II Administration. Bush II and Karl Rove believed that the Republicans could become the second, big spending, big entitlement, big government party. Of course, they were wrong. The U.S. only needs one big spending party and the Democrats dominant politics. Maybe Democrats should remember the advertisements by moveon.org that were anti-deficit spending and wanted to shrink the debt. Of course, these days, progressives are all like Krugman and want to run up even bigger deficits.

Maybe Medicare for all (except the elites) works better in other countries because citizens of those other countries have been conditioned to be much better socialist than the citizens of the U.S.

by your logic, the way to improve inner city schools is to make them exactly like the best schools in the whitest suburbs. The schools in those suburban neighborhoods turn out a great product so, the same model will produce the same result everywhere it is tried.

Medicare for all would reduce the supply of healthcare, you turn healthcare is a lousy career on par with being a public school teacher, and would punish the middle class the most.

@superdestroyer: “Medicare for all”, aka a single payer system, hasn’t done any of the horrible things you’re talking about in France and Canada. You sound like the Americans in the Fodor thread I mentioned a few posts up.

Are you really going to argue that lowering the pay of all healthcare workers and reducing the numbers of jobs will have no effect on healthcare as a career? Are you really going to argue that mediciare for all will have no negative effect to the middle class who cannot afford private, boutigue care nor have the time to wait in line all day waiting for a provider?

@superdestroyer: You seem to be saying that controlling medical costs is bad. Is that what you’re arguing? And if controlling medical costs would be bad in the US, why hasn’t it affected the quality of care in Canada and France? Or Germany? Or the Netherlands? Or Israel?

Every other developed country works hard at controlling medical costs. Public approval of their medical systems is much higher than American approval of ours.
Their medical results in terms of life expectancy and infant mortality are better than ours. And you’re saying our system is better?

Where are all your comments decrying spending and government growth when Bush was in office? There must be zillions of them. Please provide links. Failing that, please admit that you are ducking because they do not exist and spending did not really bother you all that much when that caucasian fellow was in office.

I would say that the other countries are better at being socialist that the U.S. The healthcare workers are willing to work for less and have a lower standard of living. Inner city hospitals in the U.S. are lousy places to work now. What do you think will happen if the workers have to take a 20% or more pay cut?

I hope a link to 2008 is OK. I criticized Bush and Rove for being big spenders and noted that the big spending would benefit the Democrats. Of course, I was right but I am not allowed to point it out anymore

Though Gandleman is apparently a professional ventriloquist, so there’s always a possibility.

Joe Gandelman spent many years as a freelance writer overseas and full-time reporter on the staffs of two newspapers — and as a professional ventriloquist. He is Editor-In-Chief of http://www.themoderatevoice.com, one of the Internet’s biggest and fastest growing moderate weblogs. CNN’s John Avlon named him as one of the Top 25 Centrist Columnists and Commentators.http://www.huffingtonpost.com/joe-gandelman